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Oil Rebound Propels Street Higher Ahead of Thursday European Bank Meeting

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March 9, 2016

(Wednesday Pre-Market) The story so far this year is oil prices locking closely with the stock market, and that was evident again early Wednesday as stocks moved higher after a rebound in oil one day before a key European Central Bank (ECB) policy meeting.

Early Wednesday, oil reversed Tuesday’s declines, with U.S. oil futures trading back above $37, up more than 35% from last month’s decade-low prices. European futures climbed above $40. Crude oil and S&P 500 (SPX) futures now have a 92% correlation, meaning stocks and oil frequently rise and fall together.

The overnight turnaround in oil came after media reports that producers both in and outside of OPEC plan to meet in Moscow later this month to discuss an output freeze. However, Russia didn’t confirm those reports, Reuters reported. The strong upward move in oil that began last month came after producers first began talking about a possible freeze.

U.S. stocks took their cue from oil, falling on the commodity weakness Tuesday and then moving higher on Wednesday. That followed the pattern that’s held so far this year, with stocks riding higher on oil strength and declining on oil weakness. Energy stocks led the losses on Tuesday.

In Europe, stocks rose ahead of the ECB’s meeting Thursday, and U.S. stocks also took their cue from Europe. Markets are baking in expectations that Thursday’s policy meeting will result in a rate cut, MarketWatch reported. A 10 basis-point cut in the deposit rate to -0.4% is expected, according to MarketWatch. ECB President Mario Draghi said last month that the ECB “will not fail to act.” The rate announcement is scheduled for 7:45 a.m. ET Thursday, with Draghi scheduled to hold a news conference 45 minutes after that. One question remaining is whether the ECB will also decide to expand its quantitative easing program. Typically, central bank stimulus and rate cuts can help lend support to equities markets.

Technically, the S&P 500 (SPX), which closed above 2000 on Monday, wasn’t able to repeat that feat Tuesday. The 2000 mark remains an important technical signpost.

S&P 500

FIGURE 1: BACK BELOW 2000.

The S&P 500 (SPX), plotted here through Tuesday on the TD Ameritrade thinkorswim® platform, fell more than 1% on Tuesday. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Wholesale Inventories Ahead: Wholesale inventories for January are due from the Commerce Department Wednesday morning, and analysts surveyed by Briefing.com expect to see a 0.2% decline. This would come on top of a 0.1% decline in December, the third consecutive month of declining inventories. Declines in machine inventories and metals inventories shaped December’s report, which showed that companies had cut back on restocking toward the end of 2015, something companies typically do when sales are soft.

Weekly U.S. Oil Stock Data Due: On Wednesday, the U.S. Energy Information Administration (EIA) is scheduled to issue its weekly report on oil stocks, with a Wall Street Journal survey of analysts predicting a 4.4 million-barrel rise in crude stocks. On Tuesday the EIA lowered its forecast for Brent crude prices in 2016 and 2017 to $34 a barrel and $40 a barrel, respectively, a drop of $3 for 2016 and $10 for 2017 from its prior estimate. It expects U.S. oil prices to average the same as Brent this year and next. The lower forecast prices “reflect oil production that has been more resilient than expected in a low-price environment and lower expectations for forecast oil demand growth,” the EIA said.

No More Fed Speakers This Week: There won’t be any further speeches by Fed officials for the remainder of this week, as the Fed has entered its “blackout” period ahead of next week’s policy meeting.

Good Trading,
JJ
@TDAJJKinahan

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